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cheap hire purchase deals

Cheap Hire Purchase

Spread the cost of buying your car

Harriet Meyer | Edited by Johanna Noble
Updated 31 August 2020

If you need a car and can't pay for it upfront, hire purchase is one of the options open to you. It's been used to buy cars almost since there have been cars, but that doesn't mean it's the right deal for you. Here we break down the basics of hire purchase so you can work out whether it's right for you.

Not the car finance option you were looking for? Check these out...

Personal car loans | Personal Contract Purchase (PCP) | Leasing

illustration

What is hire purchase?

Hire purchase is a form of car finance that can be used to buy a new or used card. You essentially HIRE the car over the contract period, with the option to PURCHASE it at the end. You normally pay an upfront deposit, followed by monthly instalments until the amount you owe has been repaid. Crucially, until this last payment has been made, you don't own the car. 

While you're paying off the finance, the finance company still owns the car. It's only once you've made ALL the payments (including the 'option to purchase' fee at the end, which is usually £100 or so) that ownership transfers to you.

The debt is also secured against the car. So if you can’t pay it, the finance company could repossess the car to help pay off your debt.

Around 10% of new cars, and 60% of used cars, are bought using HP – though it's not as popular as it once was. 

How does hire purchase work?

Once you’ve found a car you want to buy, you’ll know the amount you want to borrow.

Dealers usually ask for a deposit of 10% or more of the car's price – and if you're buying a new car, many franchised dealers (those affiliated with manufacturers like Ford, BMW etc) run promotions giving you a contribution towards this if you take one of their finance deals.

You then pay fixed monthly payments over a period of one to five years, and typical APR interest rates for HP tend to be between 4% and 8% if you've a good credit score (they can go up to a massive 50% APR if you don't). Some dealers will offer 0% finance – but this is more likely if you’ve a chunky deposit to put down.

Remember, if you fail to keep up payments the finance company is entitled to seize the car.

What happens at the end of the finance deal?

Once all repayments have been made, you pay a final fee – referred to as the 'option to purchase' fee – to own the car outright. This covers the cost of transferring ownership to you, and is typically around £100. It should be mentioned in the HP agreement you sign at the start – but if you can't find it, make sure you ask the dealer how much the fee is.

Let’s take an example of how much you'd pay in total…

Say you're buying a car priced at £14,000:

  • You pay a 10% deposit of £1,400, leaving £12,600 left to pay.
  • You borrow £12,600 over three years.
  • You get a 5% APR deal, meaning payments would be £378 a month (£13,608 for the three years).
  • After three years you can take ownership of the vehicle, paying a transfer fee of £100.
  • So in total you’d pay £15,108.

Remember! The car is owned by the finance company until the final payment and 'option to purchase' fee have been paid. Until then, you have no legal right to sell the car (though the finance company may let you if you ask, and use the proceeds to fully settle the finance agreement).

Paid off half the debt? You can return the car & walk away

Known as a voluntary termination, there's a little-known clause in the Consumer Credit Act which allows you to get out of an HP agreement early. Provided you’ve repaid at least half the total amount owed, you can terminate the agreement and return the car to the finance company.

This is a handy clause in an HP contract if you find:

  • You no longer need the car.
  • You want to cut costs.
  • You can’t afford repayments.
  • You can get a similar car for a lower cost than you would by making the remaining payments.

If you decide to do this, the car should be in good condition when you hand it back. If not, you’ll have to pay for any outstanding repair work that needs doing.

If you're not yet halfway through the payments, you’ll need to pay the amount outstanding to reach halfway before you can get out of the agreement.

Important! If you decide to end the agreement early, make sure to get everything in writing and keep a copy so nobody can claim you have defaulted on your payments.

car keys

Is HP the right option for me?

There are so many different options when it comes to buying a car, it can be difficult to choose. We've highlighted the main benefits and pitfalls of choosing HP here:

Pros

You can spread the cost, meaning may be able to get a better car than if you had to pay it all upfront.

It's simple to arrange and understand.

It's flexible – with terms from 1-5yrs (the longer the term, the more interest you’ll pay).

You would own the car once you’ve made all payments.

You may get a deposit contribution from the manufacturer.

HP can be easier to get than a standard, unsecured loan for people with poor credit histories (as the car is used as security for the debt).

It's possible you might be able to get 0% finance, though this is often reserved for those with large deposits.

Cons

Monthly payments are higher than for PCP and leasing deals.

You don’t own the car until you make the final payment.

Rates are often higher than standard car loans.

You cannot sell or modify the car over the contract term without the finance company’s permission.

If you fail to keep up payments, the finance company may take the car away (it can do this without a court order until you’ve paid a third of the total amount).

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Different car finance options compared

Broadly speaking, there are six different ways to pay for a car. The table has the key differences at a glance.

Finance type Typical length of agreement? Initial deposit required? Who owns the car? Mileage restrictions?
None – cash savings N/A N/A You No
0% credit card Up to 20 months No You (though you'll still need to repay the debt) No
Personal loan 1-7 years No You (though you'll still need to repay the debt) No
Personal Contract Purchase 1-5 years Yes (i) The finance company, unless an optional final balloon payment is made Yes
Hire purchase 1-5 years Yes (i) The finance company, until the final repayment is made No
Leasing/Personal Contract Hire 1-4 years Yes (i) The finance company, at all times Yes

(i) In most circumstances, though sometimes you can get a deposit contribution from the dealer or structure a lease deal to pay nothing upfront.

So which wins?

Sadly, there is no one-size fits all answer to this (as much hangs on whether you want to own the car and other factors). However, we've included more information on each option below, to help work out which is right for you.

  • • Cash savings – the cheapest option for most cars

    The outright winner if you want to fully own the car from day one, as you'll avoid paying any interest and be debt-free. Though if you're looking to buy a brand new car – which on average loses about 40% of its value by the end of the first year – and are likely to change it in the next few years, it's worth considering a leasing or personal contract purchase deal below as the overall cost of ownership can work out cheaper.

    • Important. Spending £100-£30,000? Pay just a penny on a credit card for protection.

      Pay something towards your car on a credit card, and you get powerful extra protection if something goes wrong down the line. This is because you're then covered by Section 75.

      Provided that the total cost of the car you're buying is between £100 and £30,000, paying anything towards it by credit card means the card company (or finance company in some cases) is equally liable along with the dealer if things go wrong.

      However, this isn't always straightforward. Some dealers don't accept credit cards and some may only allow you to pay a limited amount by card. So figure out how important this is, and ask your chosen dealer if it can accept cards before deciding how to pay.

  • • 0% spending credit card – no interest if you can get a big enough credit limit (and the dealer accepts cards)

    Depending on the price of your new car, a 0% spending credit card could be the next cheapest way to borrow. Like paying in cash, you'll own the car outright, plus you'd be covered by Section 75 protection. However, you'd need to check whether the car dealer accepts payment by credit card, as not all do.

    Sadly you usually won't know what credit limit you'd get before applying, and you should budget to pay it off before the 0% period ends as the interest rate rockets. The current longest offers 20 months at 0% – see our 0% Spending Cards guide for more information.

  • • Personal loan – usually cheapest if you need to borrow and want to own the car outright

    This usually allows you to borrow higher amounts than a 0% credit card would offer, though you'll pay interest. However, repayments will be structured to clear the debt at the end of the term, which is usually between one and five years.

    Once approved you'll receive the funds into your bank account, which you can then use to buy the car, so you'll own it outright. See our Cheap Loans guide for best buys and full help.

    • Important. Spending £100-£30,000? Pay just a penny on a credit card for protection.

      Pay something towards your car on a credit card, and you get powerful extra protection if something goes wrong down the line. This is because you're then covered by Section 75.

      Provided that the total cost of the car you're buying is between £100 and £30,000, paying anything towards it by credit card means the card company (or finance company in some cases) is equally liable along with the dealer if things go wrong.

      However, this isn't always straightforward. Some dealers don't accept credit cards and some may only allow you to pay a limited amount by card. So figure out how important this is, and ask your chosen dealer if it can accept cards before deciding how to pay.

  • • Personal Contract Purchase (PCP) – can be good if you want to get a new car every few years, otherwise a hefty final payment and often more expensive overall than a loan

    A popular way to get a new car, especially if you frequently change car and want to pay for it monthly. It's basically a loan, though usually cheaper each month as you won't be paying off the full value of the car. You also won't own it at the end, unless you choose to.

    You set a term for the agreement and pay a deposit (eg, a three-year term with a £2,000 deposit). The finance company then provides a final value that the car will be worth at the end of the agreement (eg, £6,000). These are then subtracted from the cost of the car to work out how much the loan will be (eg, you'd owe £12,000 over three years for a £20,000 car).

    There's usually a mileage allowance (eg, 8,000 miles a year), but provided you stick to that and don't damage the car, you can return it and walk away at the end of the agreement. Alternatively, you have the option to pay the final value to own it, also known as a balloon payment.

    As the dealer will be making money from the finance deal, you may find it offers larger discounts or contributions to the deposit on new cars. For used cars, it may mean you can haggle more off the sale price. Always be careful and make sure to calculate the total cost you'll need to repay after all interest has been added. This will then show the 'true' value of the discount.

  • • Hire purchase (HP) – an option to consider if you're struggling to get a cheaper loan, though the lender owns the car until you fully repay

    This works in a similar way to a loan – as you're borrowing and paying off the full cost of the car – though you won't own it until you've made the final payment. Instead the car is owned by the finance company as it uses it as security against the loan (like a mortgage), so if you fail to pay it can seize the car.

    This can mean it's easier to get than normal loans, though you'll usually need to pay a deposit (often 10% or more of the car's price). You'll therefore need to consider how to fund that. However, if you're buying a brand new car from a dealer, it's worth checking if it offers a promotional contribution towards this.

    As the dealer will be making money from the finance deal, you may find it offers larger discounts or contributions to the deposit on new cars. For used cars, it may mean you can haggle more off the sale price. Always be careful and make sure to calculate the total cost you'll need to repay after all interest has been added. This will then show the 'true' value of the discount.

    See our Hire Purchase guide for full information.

  • • Car leasing/Personal Contract Hire (PCH) – low monthly rental payments, though you'll never own the car (or have the option to)

    This is a way to get a brand new car for a monthly payment, though this is essentially a long-term rental, so you'll never own the car – or ever have the option to buy it.

    Instead you'll pay an initial deposit followed by a monthly amount for the duration of the contract, which is usually over one to four years. As with PCP, you'll need to choose a mileage allowance (eg, 8,000 miles a year) and you're responsible for its upkeep.

    At the end of the agreement, you simply return the car (though you could be charged if you've exceeded the mileage or damaged the car).

    To help find a cheap lease deal, there are a host of lease comparison sites, such as Leasing.com and Lease Loco, which scan hundreds of offers from dealers across the UK. See our Car Leasing guide for full information.

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Where can I get an HP deal?

There are two main options here. The most common is to get the finance through the dealership you're buying from. However, it's worth getting quotes elsewhere first so you're able to compare the offer from any dealer, plus if you take a copy of the cheapest quote along you can ask it to match or beat it.

Whichever you opt for, remember the finance provider will own the car throughout until you have made your final payment.

Online finance brokers

HP deals can be found from a handful of online brokers. These are handy to get an idea of the prices and repayments you might be looking at on your ideal car. Brokers offer a wide range of deals, including those for buyers with a tarnished credit history. They simply supply the finance through a variety of lenders.

If you're asking for a quote from any of these brokers, check whether they'll do a hard or soft credit search when they give you a quote. If it's a hard search, be wary, as this is fully visible on your credit file to other lenders as an application, even if you then don't take out the loan.

Too many of these in a short space of time is a red flag and could wreck your chances of getting credit in the future, so think carefully.

Some of these brokers will also be able to source vehicles for you, as well as finance. But you can still get your car from any dealer in the UK, and just use the broker for the loan. Funds will be sent to the dealer after the finance agreement's signed. Here are a few of the larger brokers operating in the UK: 

  • High-street banks (for existing current account customers only). Although not an online broker, Halifax also offers a Fixed Car Plan HP deal, which provides a similar service, yet it's only for its current account customers.

    As with the other finance providers here, Halifax will send the cash straight to the dealer you're buying from. This means it will therefore own the car until the end of the deal. Halifax has a 3.4% representative APR on its car plans if the car costs £7,000 to £25,000. From £25,000 to £60,000, the rep APR is 4.4%. 

    Bank of Scotland and Lloyds Bank also offer similar HP deals to their current account customers. The rate of interest is 3.8% rep APR when you're borrowing less than £25,000 and 4.3% rep APR when you're borrowing more. The maximum amount you can borrow is £60,000.

  • Admiral. Best known for car insurance, Admiral also offers HP for nearly new and used cars, with a rep APR of 7.9%. It has its own eligibility calculator which will show you if you'll be accepted before applying.

  • Carfinance247. One of the UK's biggest car finance brokers, Carfinance247* offers deals to suit almost any budget. You source a car from any UK dealer. Once you've done this, and know how much you need to borrow, you can get a quote from Carfinance247. It has different deals depending on your credit score, with rates starting from 6.9% APR and going up to 30% APR or more for people with a bad credit history (its rep APR is 19.9%).

  • Zuto. Broker site Zuto* also has its own eligibility calculator, so you can see if you'll be accepted without marking your credit score. Its rates start at 9% though, with a representative APR of 19.8% (and some could get much higher) so always check if you can get cheaper credit elsewhere. 

Dealer finance

dealerships

Often known as forecourt finance, or just car finance, it's offered by almost every dealer in the UK – and HP is one of the options available.

Dealerships come in three main types: franchised (tied to one or more manufacturers, eg, BMW garages), independent (not tied) and car supermarkets.

Getting an HP deal through a franchised dealership

In a franchised dealership, finance deals are usually arranged through the car finance arm of a manufacturer – for example, Ford Credit, or Volvo Financial Services. It's definitely worth looking at what these dealerships can offer you on a finance deal, especially if you're buying a new car.

If this is the case, it's not uncommon for the manufacturer to give £500-£2,000 to you as a deposit contribution, and also offer 0% finance. If you don't qualify for 0% finance, you'll usually get an advertised APR offer of around 5%; though this is representative, so if you have a poorer credit history, you may be offered a much higher rate.

Getting an HP deal through an independent dealership or car supermarket

Many independent dealerships and car supermarkets get their finance from big banks' consumer arms. Blackhorse (part of Lloyds) and Santander Consumer Finance, for example, supply finance deals to non-franchised dealerships.

These finance providers aren't tied to manufacturers, and therefore can't offer the heavily subsidised 0% finance or deposit contributions that the car companies' finance arms can. If you go to one of these dealerships, expect a representative APR of somewhere between 5% and 10% – or more if you've a bad credit record.

It’s a competitive market out there – check what’s available online and from dealers, and ask yourself what you can really afford. It’s vital you can afford the repayments before you commit. With all these types of finance, if your application is accepted, finance is sent directly to the dealer.

How do I get the best deal?

The rate you’re offered will depend on your credit score, with the best rates available only to those with a squeaky clean history. Also, having a big deposit will help.

Ideally, and try to do this before you apply for HP finance, take the time to check your credit history at one of the main agencies. If it’s in need of improvement, consider ways to boost your score. See our Credit Scores guide for more.

Once you've checked your credit score, then find the cheapest deal you can. If you've got your heart set on HP finance, then find the cheapest HP deal. If you'd be happy with a personal car loan then this is almost certainly going to work out cheaper, though they are harder to get than car finance, as they're unsecured.

With car finance, much depends on where you're buying the car, how much you need to borrow and how good your credit record is. As such, there's no one-size-fits-all answer, other than to say: compare all the finance options, and pick the cheapest.

people in hp car

Hire purchase Q&A

  • What effect will getting an HP deal have on my credit rating?

    When you apply, the lender will do a credit check to decide whether to lend to you, and this check will appear on your file as an application for credit.

    Credit checks for HP aren't usually as stringent as those for personal loans. This is because the HP finance is secured on the car – if you don't pay, they can just come and repossess the car, whereas for loans there's no security, so they'd need to chase you through the courts.

    Pay the finance off on time each month, and it'll help your credit record. Fail to pay on time, and you'll be marked as 'in default', which could affect your ability to get a mortgage or other credit. See our Credit Scores guide for more info.

  • Are HP loans ever worth it compared with standard loans?

    They can be, and particularly if you can get a 0% deal (often reserved for those with high deposits of 40% or more).

    If you can't get a 0% deal, check that the interest rate on what you're being offered is an annual percentage rate (APR) and compare it against the rate you’d be able to get on a standard loan.

  • What happens if I miss a payment?

    If you find you're not able to make repayments, always contact the lender - ideally before the next payment is due. If it knows you're struggling, it should help you by offering an alternative and affordable repayment plan.

    If you miss a payment, it's likely the lender will contact you to see what's wrong. If you keep missing payments, they'll mark you as in default. Once this happens, they'll usually take back the car quite quickly, as to leave it with you while they chase payments risks the car depreciating in value.

    As well as taking the car, if you fail to keep up repayments, you'd get a default mark on your credit file, which could affect your ability to get a mortgage or other credit. See our Credit Scores guide for more info.

  • Why do dealers sometimes quote 'flat' interest rates?

    Dealerships sometimes quote this to make a finance deal look more appealing.

    A flat rate means you’re charged interest on the original amount you borrow, no matter how much you’ve paid off, which isn't how interest really works. So a flat rate of 6% might sound cheap, but it’s actually the equivalent to 12% APR.

    The APR will be on any finance agreement you sign, so make sure you look for it. If you're being quoted an interest rate, make sure you ask if it's the APR – if not, ask what that is.

  • How can I make repayments as low as possible?

    You can pay a bigger deposit, meaning you borrow less. Or you can spread repayments over a longer period. However, doing this means you will pay more interest, so consider whether it's worth it.

  • What if I want to pay off my HP deal early?

    You can do this at any time. Unlike a standard personal loan, an HP doesn't have any fees if you want to pay off the entire loan early.

    Contact your lender and ask what the best way to do this is.

  • What if there's a problem with the car?

    If you buy a car using HP and realise it's faulty, it's worth returning it and asking the dealer to fix it. If the dealer refuses or tries to charge you, go to your HP provider.

    Your HP finance provider legally owns the car until the loan is repaid, so your contract is with it – not the dealer that set up the agreement. This means your HP provider is legally responsible for any problems with the car.

    Buying on HP means you’ll specifically need to quote something called the Supply of Goods (Implied Terms) Act. This states that goods must meet their description and be of a satisfactory quality and fit for purpose. You can quote this legislation when making a claim for the faulty car against your HP provider.

    So, by all means try to resolve the problem with the supplier, but if this doesn't work, try the HP provider, which is the company you're making repayments to. It's bound under the same act, and if you're still not happy, take your complaint to the free Financial Ombudsman Service.

  • The dealer's offered me gap insurance to protect me in case I write the car off. Do I need it?

    There are three main types of gap insurance policies, but they all have the same general aim. If you have a crash, or your car's stolen, your insurer will usually only pay out the amount the car is worth at that time.

    Gap insurance is a policy you can buy which pays out an amount above this, either to get you back to the original sale price of the car, to the amount you have outstanding on finance (which can, at times, be greater than the car's worth), or to the amount it would cost to buy the car new now.

    It’s offered because cars depreciate really quickly - on average new cars lose 60% of their value within three years.

    It's not mandatory, so you need to decide if it's worth it. Always compare policies as those sold by dealerships tend to be expensive. See our guide to Gap Insurance for full info and cheap providers.

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